Reasons for investing in Real Estate vs. Stocks
Many investors have historically turned to the stock market as a place to spend their dollars. Although stocks are a well-known investment choice, not everyone knows that buying real estate is also an investment. Under the right conditions, real estate can be an option to stocks, offering lower risk, producing better returns, and providing greater diversification.
Whether preparing for retirement, investing for a college fund, or collecting residual income, individuals need an investment strategy that suits their budget and needs. Comparing investment in real estate to purchasing stock is a reasonable place to start.
KEY TAKEAWAYS
- The decision to invest in real estate or stocks is a personal option that depends on your financial condition, risk tolerance, priorities, and style of investing.
- Real estate and stock have different challenges and opportunities.
- Real estate is not as liquid as stocks and appears to take more time and resources. It does, however, have a passive income stream and a potential for significant appreciation.
- Stocks are subject to business, economic, and inflationary uncertainties, but do not require a significant infusion of cash and can usually be quickly bought and sold.
Real Estate vs. Stocks
Investing in real estate or securities is a personal decision that depends on your financial position, risk tolerance, priorities, and style of investing. It’s fair to say that more people are investing in the stock market, perhaps because it doesn’t take as much time or resources to purchase stocks. If you’re buying real estate, you’re going to have to save a lot of money.
You buy a small piece of the business when you buy stocks. In general, you can make money on stocks in two ways: value appreciation as the company’s stock rises and dividends.
When you purchase real estate, you purchase physical land or property. Many real estate owners make money by receiving rents (which can provide a steady stream of income) and by appreciation, as the value of the property increases. Also, because real estate can be leveraged, you can increase your assets even if you can’t afford to pay cash straight away.
For many prospective investors, real estate is desirable because it is a tangible asset that can be managed, with the added advantage of diversification. Real estate owners who purchase land own something tangible for which they can be kept accountable. Notice that real estate investment trusts ( REITs) are a method of investing in real estate and are purchased and sold as stocks.
There are a number of considerations for investors when choosing between investing in stocks or buying real estate as an investment.
Returns: Real Estate vs. Stocks
Investing in the stock market makes the most sense when combined with incentives that maximize your returns, such as a 401(k) matching business. But those benefits are not always available, and there is a limit on how much you will benefit from them. Investing separately in the stock market can be volatile, and the return on investment ( ROI) is always lower than anticipated.
Comparing real estate and stock returns is an apple-to-orange comparison — the variables that influence costs, values, and returns are quite distinct. However, we can get a general idea by comparing the total returns of the SPDR S&P 500 ETF (SPY) and the Vanguard Real Estate ETF Total Return (VNQ) over the last 20 years:
Risks: Real Estate vs. Stocks
The housing bubble and financial crisis of 2008 brought down the valuation of investors in the real estate and stock markets — and the COVID-19 crisis is doing it all over again, though for different reasons. Even it is important to note that stocks and real estate have very different risks overall.
Real Estate
Here are some aspects that need to be considered when it comes to real estate and the risks associated with it. The most critical danger people face is that real estate takes a lot of studies. It’s not something that you can go into casually and expect instant results and returns. Real estate is not an asset that is readily liquidated and can not be cashed in instantly. This means that when you’re in a bind, you can’t cash it in.
For home flippers or others who own rental properties, there are risks associated with the handling of maintenance or the management of leases. Any of the biggest problems you will face are the prices, not to mention the time and headache of having to deal with the tenants. And if there’s an accident, you can not be able to put them off.
As an investor, you may want and need to consider hiring a contractor to repair and renovate your flip, or a property manager to oversee the maintenance of your lease. This may cut to your bottom line, but it decreases your time spent managing your investment.
Stocks
The stock market is subject to many different forms of risk: market, economic and inflationary risks. Second, stock values can be highly volatile due to market volatility in their prices. Volatility may be caused by geopolitical and corporate events. For example, if a business operates in another country, the foreign division is subject to the laws and regulations of that nation.
But if the economy of that country has problems, or if any political problems occur, the stock of that business can suffer. Stocks are often subject to the economic cycle as well as monetary policy, legislation, tax revisions, or even adjustments in the interest rates set by the central bank of the country.
Other risks can arise from the investor. Investors who chose not to diversify their portfolios are also at greater risk.
Consider this: dividend-paying stocks can generate reliable income, but substantial investment in high-yield dividend stocks will be needed to generate enough income to support retirement without selling additional securities. By relying solely on high-yield dividends, an investor could lose out on opportunities for higher-growth investment.
Pros and Cons: Real Estate
Real estate owners have the potential to maximize their money and profit from significant tax benefits. While real estate is not nearly as volatile as the stock market, the long-term cash flow provides a stable income and a promise of appreciation.
Despite this, it is important to consider the amount of money that goes into real estate investment. You need to be able to obtain down payment and funding if you’re not doing all-cash offers.
Since real estate is not as liquid, you can not rely on selling your properties immediately when you may be in need of it. Such drawbacks include the expenses of land management and the expenditure of time for repairs and maintenance.
Pros
- Passive sales
- Tax benefits
- Hedge against inflation
- Power to exploit
Cons
- More effort than the acquisition of stocks
- Costly and illiquid
- The high cost of transaction
- Recognition is not assured
Pros and Cons: Stocks
For most investors, a massive cash injection is not required to get started on the stock market, making it an enticing choice. Unlike real estate, stocks are liquid and are usually quickly purchased and sold, so you can rely on them in the event of an emergency. With so many stocks and ETFs to choose from, it can be easy to create a well-diversified portfolio.
But, as noted above, stocks tend to be more volatile, leading to more risky investments, particularly if you’re in a panic. Selling your stocks can result in a tax on capital gains, making your tax burden much heavier. And unless you’ve got a lot of money on the market, your holdings can not be able to expand a lot.
Pros
- Extremely liquid
- Simple to diversify
- Low transaction fees
- Simple to add to tax-advantaged savings accounts
Cons
- More volatile than real estate
- Selling stocks may cause large taxes
- Some markets have been trading for years
- Capacity for emotional-driven investment
Additional Factors to Consider
Buying a property needs more upfront capital than investing in bonds, mutual funds, or REITs. However, when buying land, investors have more control over their assets, allowing them to purchase a more attractive investment vehicle.
Putting $25,000 in shares buys $25,000 in value — assuming you’re not using a margin. Conversely, the same investment in real estate might purchase $125,000 or so in mortgage-deductible and tax-deductible assets.
Cash collected from rent is required to pay mortgages, insurance, property taxes, and maintenance. But well-managed properties also produce income for owners. Additional investment property incentives include depreciation and other tax write-offs.
Discrimination against mortgage lending is unconstitutional. If you believe you have been discriminated against on the grounds of race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such move is to send a report to the Consumer Financial Protection Bureau or the U.S. Department for Housing and Urban Planning (HUD).
Real estate, which generates monthly rental income, will raise inflation even in the rent-controlled sector, which provides an additional benefit. Taxes after the sale of the investment are another factor. Selling stocks typically results in taxes on capital gains. Real estate capital gains can be deferred if another property is acquired after the sale, referred to as a 1031 swap in the tax code.
The Bottom Line
Real estate and stocks offer both risks and rewards. Investing in the stock market receives a lot of attention as a retirement investment vehicle, especially for people who regularly contribute to a tax-advantaged account, such as a 401(k) or an individual retirement account (IRA). However, diversification is significant, particularly for long-term savings.
Investors should select a variety of asset classes or sectors to reduce their risk. Investing in real estate is the perfect way to diversify your investment portfolio, reduce risk, and optimize returns. Bear in mind that many investors are pouring capital into both the stock market and real estate. And if you like the concept of investing in real estate but don’t want to own and operate real estate, a REIT may be worth a second look.
Will you need insurance for small businesses?
Fiscal responsibility makes sense when you’re trying to expand your business, but small business insurance is far from a high cost. Consider it more of an opportunity to shield the business from a future problems-an opportunity worth making. No matter how big your company is, the unexpected could happen at any moment. Get a quotation or speak to a professional about the coverage you need.
